Along came operation twist, which was first employed by the Fed was in 1960. Yes, it was named after the dance craze at the time – the “Twist!” While the dancing was fun, operation twist in 1960 only reduced long-term interest rates by fifteen basis points or 0.15%. Lending did not increase at that time and it is not increasing today.
The G20, comprised of the leaders of the twenty most powerful economies in the world, met in Los Cabos, Mexico last week for a scheduled meeting to discuss global financial issues. This meeting was particularly important due to the debt crisis that is spreading across Europe, specifically the troubles in Greece, Spain and Italy that are challenging the survival of the Euro (the common currency of the seventeen-member European Union). With essentially all of the world’s wealth and military power represented at the G20; with one-on-one meetings between many of the heads-of-state of these nations; with all this power in one place – surely the global financial markets were focused on the intellectual decisions and carefully worded statements that would result from this assembly of leadership? Well, maybe not! The global financial markets were focused on one mild, bearded, former academic who was holding court in Washington, D.C. Yes, the world was waiting for words from the true power, the U.S. Federal Reserve Chairman, Ben Bernanke.
While world leaders in Los Cabos made sure that news cameras captured their serious facial demeanors and that all waiting microphones were served deep philosophical wisdom, it was Chairman Bernanke’s news conference last Wednesday that was the highly anticipated main event. His appearance before the media followed the conclusion of the most recent meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve. The FOMC meets on a regularly scheduled basis to determine monetary policy and interest rate targets (the primary tool used by the Federal Reserve to stabilize the economy). The committee decided to leave interest rate targets unchanged. Short-term rates (those that are truly under the influence of the Federal Reserve) are currently between zero and one quarter of one percent, so lowering these rates was not an option. The FOMC decided, instead, to extend to the end of 2012 the Federal Reserve’s current program of maturity swapping. This action, referred to as “operation twist,” is a process of selling treasury bonds with maturities of less than three years that the Fed holds on its balance sheet, and using the proceeds to buy treasury bonds with maturities of between six and thirty years.
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